BASF: The Chemical Company?

I’m working on C&EN's annual survey of the Global Top 50 Chemical Companies. Perusing BASF’s annual report reminded me of one of my favorite observations about that company. BASF calls itself “The Chemical Company”--and it most certainly is, by any measure, the largest chemical company in the world— but the company’s Wintershall oil and gas business rakes in most of BASF’s earnings. While oil and gas made up 22% of BASF’s €50.7 billion in sales in 2010, it generated 62% of its €3.7 in operating profits in 2009. In 2008, it was the same story: 59% of its profits on 23% of its sales. One might wonder if this is a recessionary anomaly. Indeed, BASF’s chemical operations slumped in the economic downturn while Wintershall remained strong. This is a factor, but not an enormous one. Oil and gas comprised 18% of BASF’s sales in the pre-downturn year of 2007 and racked in 41% of its profits. After that time, the company’s chemical profits headed downward. However, Wintershall was still BASF’s most profitable unit by a mile. Its profit margin was 28%, versus 20% for its next most profitable reporting segment, chemicals. What is the point of this observation? Oil and gas is a classic cash cow, a large earner that helps the company make big acquisitions like Cognis, Engelhard, Degussa’s construction chemicals unit, and Ciba. The cigarette tow business serves a similar function for Eastman. One can image what would happen if BASF decided to suddenly divest its oil and gas business. (I never heard of BASF considering such a thing.) The unit's book value is roughly €5 billion. Its earnings suggest it would be worth way more than that. Moreover, the company’s business is a nice strategic asset, with North Sea operations in Germany and Norway and strong positions in Russia and Libya. A fairly conservative estimate would put the business in the neighborhood of $15 billion. That’s enough cash to buy nearly every other chemical company outright and probably adequate to buy ANY of its peers with financing.

Author: Alex Tullo

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